The bulls looked like unlikely winners at mid-week, but still managed to pull it off with the May contract gaining 108 points Vs the March 29 settlement. The May – July spread strengthened to finish the week inverted at 36. The old crop/new crop straddle strengthened Vs the pre-Easter weekend at 424, the Dec contract gained 21 points on the week, settling at 77.94.
Trading action on the ICE was quite volatile for the week. Index fund rolls, strong US export sales data and, in particular, an announcement from China that it would impose a 25% duty on $50B worth of US imported goods (including cotton and soybeans) drove market action. However, ICE cotton underwent a modest correction once it was clear that the proposed tariffs would not take effect immediately, leaving room for negotiation between the US and China, which clearly seems to be in the best interest of both nations.
There are varying schools of thought on just what effect any implemented tariffs by China would have on US soybean and cotton prices. While there is not near enough space to properly discuss this topic at length in this here, suffice it to say that we believe such would be less devastating that many have opined while also ultimately proving to be southward of where the most optimistic pundits are predicting.
In the end (for the week), ICE futures were seemingly supported by a hefty mill on-call position, droughty conditions across Texas, Oklahoma and Kansas, a generally late spring across much of the Midsouth and the southeastern states – and via very strong demand for US cotton, too.
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With respect to the latter, US export business continues at a torrid pace. Total net sales and shipments against the current marketing year were modestly higher Vs the previous sales period at approximately 378K and 481K running bales, respectively. Shipments again eclipsed the weekly pace required in order to match the USDA’s 14.8M bale export target – a figure that we expect will be significantly enhanced in next week’s WASDE report. However, we also think that such will likely be the only major adjustment(s) to the 2017/18 S&D balance sheets Vs March. The monthly Bloomberg pre-WASDE survey of analysts and traders shows that most of our contemporaries agree with us on this one.
More on Cotton
We are now projecting 2017/18 exports at 16.4M 480lb bales; shipments will need to average around 422K running bales per week for the remainder of the current MY in order for our projection to be realized.
The Dec contract’s behavior this week reflected the turmoil in the news. Some observers commented that it was almost as if US trade policy was being directed by emotion and ego, rather than a sober reflection of long term prosperity, but that is clearly an absurd notion.
There are two things producers should take away from this week’s trading.
- The first is that specs are an emotional lot, and they are easily spooked. This week it was Trump tweets and the Chinese response, but next week it could be beneficial rains in Texas. Like nearly every other market commentator, we have consistently encouraged producers to have 1/3 to ½ of their expected yield priced by planting time, and we continue to offer that advice. Current forward contracting options should guarantee producers a break even or slightly better price, and that’s nothing to be taken for granted.
- The second thing is that between planting season and the potential for an all-out trade war, volatility will be the name of the game going forward. Fortunately, the option pit is open for business, and it is hard to think of a better way to manage your risk than a well thought out option strategy. Options aren’t complicated, and any broker worth their salt can walk a producer through a good risk management strategy in less time than it took to write this column. By all means, talk to your broker. If you don’t have an account with a broker, consider opening one.
For next week, the standard weekly technical analysis for and money flow into the May and July contracts is supportive, at least. However, trading action next week will likely framed by the April WASDE release – which we think is likely to be more supportive than not – and the weekly US export report, which will also likely be supportive to bullish.
Have a great weekend!
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